Stocking Under Uncertain Demand and Product Variety
Posted: 9 Feb 2019
Date Written: January 15, 2019
Efficient inventory management in the face of product variety is an important part of retail operations management. In this paper, we analyze the optimal stocking policy for a retailer, in a set up with a single horizontally differentiated product with an arbitrary number of product variants, stochastic demand, and two-level consumer choice. We assume that each customer will purchase one unit of a preferred product variant, if it is in stock, and will seek to buy a second-choice product, if the former is not in stock. We allow the second choice to depend probabilistically on the first choice. Our benchmark model is single-period with symmetric prices and costs. We find simple conditions under which the objective of maximizing expected profit is jointly concave in the stocking levels of the product variants; under these conditions we prove that the optimal stocking levels are simply the optimal newsvendor quantities. We extend the base model to consider asymmetric prices for the product variants, and use a numerical study to illustrate the impact of cost and other performance measures on the optimal policy. We also model and solve an infinite horizon extension of the benchmark model.
Keywords: Inventory Management, Substitution, Multi-Period
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